ASSOCIATED BANK V.

CA
252 SCRA 620

FACTS:
The province of Tarlac maintains an account with PNB-Tarlac. Part of its
funds is appropriated for the benefit of Concepcion Emergency Hospital. During a post-audit done by the
province, it was found out that 30 of its checks weren’t received by the hospital. Upon further investigation, it was
found out that the checks were encashed by Pangilinan who was a former
cashier and administrative officer of the hospital through forged
indorsements. This prompted the provincial treasurer to ask for
reimbursement from PNB and thereafter, PNB from Associated Bank. As the two banks didn't want to
reimburse, an action was filed against them.

HELD:
There is a distinction on forged indorsements with regard bearer instruments and instruments payable to
order.

With instruments payable to bearer, the signature of the payee or holder is unnecessary to pass title to the
instrument. Hence, when the indorsement
is a forgery, only the person whose signature is forged can raise the defense of forgery against holder in due
course.

In instruments payable to order, the signature of the rightful holder is

essential to transfer title to the same instrument. When the holder’s
signature is forged, all parties prior to the forgery may raise the real defense of forgery against all parties
subsequent thereto. In connection to this, an indorser warrants that the instrument is genuine. A collecting
bank is such an indorser. So even if the indorsement is forged, the collecting bank is bound by his
warranties as an indorser and cannot set up
the defense of forgery as against the drawee bank.

Furthermore, in cases involving checks with forged indorsements, such as

the case at bar, the chain of liability doesn't end with the drawee bank. The drawee bank may not debit t
he account of the drawer but may generally pass liability back through the collection chain to the party who
took from the forger and of course, the forger himself, if available. In other words, the drawee bank can
seek reimbursement or a return of the amount it paid from the collecting bank or person. The collecting bank
generally suffers the loss because it has te duty to ascertain the
genuineness of all prior endorsements considering that the act of
presenting the check for payment to the drawee is an assertion that the
party making the presentment has done its duty to ascertain the
genuineness of the indorsements.

With regard the issue of delay, a delay in informing the bank of the forgery, which deprives it of the
opportunity to go after the forger, signifies
negligence on the part of the drawee bank and will preclude it from claiming reimbursement. In this case,
PNB wasn't guilty of any negligent delay. Its delay hasn't prejudiced Associated Bank in any way because
even if there wasn't delay, the fact that there was nothing left of the account of Pangilinan, there couldn't be
anymore reimbursement.